March Market Update: Pricing for perfection

Here's our latest market update. You can also download our summary for investors to share with your clients.

What's moving markets

Stock markets rounded out March, and the first quarter of 2024, in style as promising indications of a soft landing continued to encourage investors into risk assets. Resilient economic and positive inflation data made this possible despite most central banks holding interest rates at their current levels. The Swiss central bank however stole a march on the competition and became the first developed nation to begin cutting rates. 

An increase in consumer spending helped to drive the US economy which was confirmed to have grown at 3.2% in the last quarter of 2023, although inflation remained sticky however and saw a small year-on-year uptick in February to 3.2%. 

A resilient economy, slightly stickier inflation and a continuing strength in the jobs market helped the Fed to unanimously decide to leave interest rates at 5.25 – 5.5% for the fifth straight meeting. The latest dot plot remained unchanged however, with three 25bps cuts expected throughout 2024, a lot less than the six cuts the market expected at the beginning of the year. 

The UK is showing more positive signs as headline inflation fell more sharply than expected to 3.4% in February (down from 4% in January), taking it to the lowest level in 2 ½ years. Services inflation also fell, but less than expected from 6.5% to 6.1%. 

The Bank of England (BoE) Monetary Policy Committee consequently kept rates at a 16 year high of 5.25%, although Governor Andrew Bailey stated inflation and the economy is moving in the right direction which was complemented by a dovish shift in votes, with the two remaining hawks on the committee voting for no change rather than a hike. As a result, markets are now pricing in the potential that the BoE may cut rates in advance of the Fed. In a rare further boost for the UK the Office for Budget Responsibility revised their economic growth projections upwards and predicted the UK will see between 0.8% and 1.9% GDP growth for 2024 and 2025 respectively. 

Headline inflation in the Eurozone also fell to 2.6%, down from January’s 2.8%. Falling rates and a spluttering Euro-area economy saw economists predict the European Central Bank (ECB) will make mid-year interest rate cuts. Despite this, the ECB kept rates at historically high levels (the main refinancing rate stayed at 4.5% and the main deposit facility rate at 4%) to try and balance concerns over a possible recession and persistent inflationary pressures.

In the end of an era, Japan raised interest rates for the first time in 17 years and in doing so, ended the world’s last negative interest rate policy. The Bank of Japan also announced they are ending its yield curve control policy. Japanese stock markets continued to steal the limelight year to date, as corporate governance reforms continue to be implemented. 

In February, China set its annual growth target at 5% for 2024 – perhaps an ambitious goal considering the property slump and persistent deflation hampering the economy which  put pressure on policy makers to ramp up stimulus and support measures. 

Asset class implications

Government bond markets have had a difficult start to the year - yields have risen as the timing and magnitude of expected interest rate cuts have been dialled back. 

During March, yields on UK government Gilts fell following the softer than expected inflation prints and the increasing likelihood of rate cuts coming from the BoE in June. This drove the FTSE Actuaries UK Conventional Gilts All Stocks index up by 1.73% - not enough to erase the losses YTD, with index still down 1.62%. 

In comparison, US treasury yields rose following the upside surprise to US inflation which saw markets rowing back on both the timeline and scale of interest rate cuts. Global Corporate Credit and Global High Yield had a better month as they’re less sensitive to yield movements and spreads generally tightened during the month on the back of a dissipating hard landing narrative. 

Oil and gold prices rose in March, with   gold breaking multiple all-time highs. This had a positive effect on the FTSE All Share which returned 4.75%, with industrials, energy and mining companies leading the charge. Japan, the US and Europe also surged higher on the month with the S&P 500, the Nikkei 225 and the Euro Stoxx 600 hitting record highs. Emerging Markets lagged developed markets as investors remain cautious about the prospect for Chinese growth and a lack of any meaningful stimulus. 

Stock markets seem to be looking through to a future of interest cuts and reacting accordingly, even if those cuts have been pushed back and they appear to be pricing in perfection with the first quarter gains showing no signs of slowing down. In this environment it’s prudent to prepare for the inevitable pullback as is normal in most market cycles. Investors should remain diversified and cognisant of the risks in markets that have seen outsized gains. High nominal yields means fixed income remains attractive, and in the case of government bonds, look well placed to cushion any potential market dislocations in the shorter term. 

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.